International Zinc Association 2022 to focus on zinc smelters’ output cuts
Negotiations of yearly zinc concentrate treatment charges (TC) contracts for 2022 high on agenda of annual conference in La Quinta, California
Among the participants was Glencore, which will negotiate the zinc TC benchmark alongside the world’s largest smelter, Korea Zinc, for a steady supply of concentrates from Teck’s Alaskan Red Dog mine for the remainder of the year.
The number will be an industry reference in settling the contracts of raw materials for smelting the galvanizing metal.
Last year, the zinc TC benchmark was settled at $159 per tonne with zero price participation or active scales, down nearly 50% from 2020 with major disruptions in production hubs due to the pandemic, as well as a resurgent global demand for metals.
This year, many market participants told Fastmarkets they expect the tides to turn and for the benchmark TC to increase for 2022 supply of zinc concentrates, with an upside of $20 per tonne to over $50 per tonne from a year ago.
“Given that we’re now seeing spot numbers of around $120-150 per tonne, it’s likely that the smelters involved in the benchmark will use this to increase their numbers to the $200 [per tonne] level, or even above it,” a trader said.
Fastmarkets analysts, based on the bi-weekly zinc spot concentrate TCs, cif China tracking spot market activity, found “an R-squared correlation coefficient between the two to be as high as 0.93" to forecast the benchmark.
“This statistical relationship suggests the 2022 benchmark should settle around $190-210 per tonne, based on our first-quarter average spot market forecast of $120-140 per tonne,” Fastmarkets’ James Moore said.
Power costs and smelters’ buying appetite
Zinc smelters’ appetite for raw material is uncertain, with pressure from rising operation costs.
Since the last quarter of 2021, the biggest European zinc smelters have been forced to cut production on high energy costs in Europe.
Physical zinc premiums in Northern Europe are close to record-high levels. Fastmarkets’ assessment of the zinc SHG min 99.995% ingot premium, dp fca Rotterdam is at $350-400 per tonne, up three times from $90-105 per tonne in the start of 2021.
Chinese zinc smelters were also subject to a wide range of emissions-cutting policies in 2021, with restrictions extending to ongoing Winter Olympics.
Market participants outside of China are also weary of a recent resurgence in Covid-19 cases in some areas of the country, which has forced smelters in the aluminium sector to shut down production, but local sources say that they do not expect smelting capacity to suffer as a result, Fastmarkets learned.
Fastmarkets assessed the zinc spot concentrate TCs, cif China at $125-140 per tonne on February 11 Friday, up from $110-135 per tonne on January 28.
Some sources expect the zinc concentrate market to be in a surplus in 2022, allowing the TC to rise.
“We are modelling a modest surplus for the zinc concentrate market this year, given growth in mine supply and the net effect of smelter capacity additions and cutbacks,” Fastmarkets analyst James Moore said.
Researchers at Citibank estimated the surplus at 179,000 tonnes for 2022, although commodities strategist Oliver Nugent noted that “the actual concentrates markets will feel tighter because of stocks in transit/building up at producer locations.”Meanwhile, “post-pandemic China, and the government’s decisions around economic policy and consumption, will definitely have an impact on negotiations too, and this could lead to some hesitancy on the buy-side from their smelters,” leading to a bigger surplus in the concentrates market, one trader in Peru noted.
If the Chinese government signals a more expansive approach to its economy at the Two Sessions meetings in early March, the market could become more constrained, participants across the board noted.
“If smelters see that they can open the valve, it will push demand up, which could have an impact on the arbitrage,” a second European trader said.
A persistently negative arbitrage has kept Chinese buyers’ appetite for imported zinc concentrate and refined material - and for metals like copper and lead - largely at bay since late 2021.
The arbitrage loss for zinc currently stands at around 2,000 yuan per tonne, as opposed to the “acceptable” level of 500-600 yuan per tonne, Chinese sources said.
If the arbitrage loss narrows, concentrates purchasing will quickly resume because imports account for 30-40% of all concentrate use in the country. That figure is rising because domestic mining is small in scale and sparsely distributed around the country while mining grades are falling, sources said.
Logistics, political uncertainty lingering
Elsewhere, “supply issues and constraints added to the continued freight issues, both in terms of cost and congestion, will be key topics” discussed at the conference, a producer said.
The global constraint in the fright industry has meant that “the material is never where it’s supposed to be – in the mine or with the smelter. It’s always lost in a port somewhere and I think this logistics issue will carry on this year” a second producer said.
“The political situation in our country, Peru, and neighbors like Bolivia and Mexico, is still delicate. At any time, there can be strikes, roadblocks,” the first Peru-based trader said.
“So even though there is a feeling of more availability, any disruptions in the social order of these countries could have an impact on TCs and maybe the benchmark. The markets remain in high demand, but supply could be impacted,” the trader added.
London Metal Exchange three-month zinc prices hit four-month highs of $3,744 per tonne on February 10. Due to the prevailing expectations of high zinc prices above $3,000 per tonne across the spectrum, the LME price is also supportive of higher benchmark treatment charges.
Sustainability and battery chemistry in the fold
Multiple sessions will be held at the IZA conference related to the sustainability of zinc and its possible uses in the green-energy space.
Subjects such as zinc energy storage and the importance of secondary row materials in zinc and zinc chemicals production will be discussed.
Meanwhile, the stakes in the carbon-reduced production of zinc were raised ahead of the conference, with the Swedish producer Boliden announcing the start of sales of its low-carbon zinc ingots.
“The industry reaction to it, especially given the US love of oil and the inflation in energy, will be important,” the first producer said.
Yiwen Ju, in Shanghai, and Yasemin Esmen, in New York, contributed to this article